Participants Averse to Annuities May Like Deferred Income Products

January 8, 2019 by
John Manganaro

The latest Issue Brief publication from the Employee Benefits Research Institute (EBRI) shows only a very small percentage of defined contribution (DC) and individual retirement account (IRA) balances are annuitized in a given year.

What’s perhaps more surprising is that a significant percentage of defined benefit (DB) plan accruals have been taken as lump-sum distributions when the option was available. According to EBRI, the hesitation to annuitize retirement savings can leave individuals exposed to longevity risk and other challenges, such as uncertainty about how much one can spend monthly without risking running low on funds at some point during retirement.

“Some believe that cost is an issue,” the EBRI brief suggests, but researchers point out that not all annuities are expensive relative to other products or investment options. The Issue Brief points to deferred income annuities (DIAs) as an example of an annuity-type product that is designed to reduce the probability of outliving savings by providing monthly benefits only in the later stages of retirement.

“Because of their delayed payments, DIAs could be offered for a small fraction of the cost for a similar monthly benefit through an annuity that starts payments immediately at retirement,” EBRI’s brief says. “Many [experts] believe that the lower cost would at least partially mitigate retirees’ reluctance to give up control over a large portion of their DC and/or IRA balances at retirement age.”